Apparel industry breathes some sigh of relief

Easing inflationary concerns send apparel stocks higher

By

AndriaCheng

NEW YORK (MarketWatch) — Against apparel industry worries that inflationary pressures may hurt consumer demand and eat into profit margin, second-quarter results from apparel companies including Liz Claiborne Inc. and Jones Group Inc. so far have given some sighs of relief.

With cotton prices more than doubling earlier this year to more than $2 a pound in their first inflationary move for the first time in at least a decade, the industry has been bracing for increased cost pressures, especially in the second half. Cost inflation has been pegged at anywhere between 10% to 15% for the most part.

With the economy and job market remain troubled, the near-term concerns have been how much room the industry has to pass on rising costs to a still budget-cautious consumer.

Early indications from apparel companies’ second-quarter reports have given some encouraging signs, with companies from VF Corp. to Jones Group Inc. reporting early price increases meeting with no to little resistance from retailers and shoppers.

Cotton prices, while still about 30% higher from a year earlier, have also declined to about $1 a pound from their peak earlier this year. That’s also expected to ease cost pressures next year.

“Worldwide, production of cotton is up, demand for cotton in the United States is down and supply and demand are coming back into balance,” said baby clothing maker Carter’s Inc.’s Chief Executive Michael Casey on a conference call Thursday after the company reported better-than-expected profit. We’ve gained visibility on spring 2012 product cost increases.”

He said while 2012 costs are still expected to be higher than spring 2011, the increases aren’t expected to be “as significant” as the cost inflation for fall 2011.

“We may see some improvement in our current cost estimates for spring 2012,” Casey said.

Carter’s
CRI, +1.02%
shares rose almost 4% in midday trading. Its adjusted profit of 23 cents a share was 10 cents ahead of analysts surveyed by FactSet. Its third-quarter profit outlook also was better than expected.

“Our outlook for product costs is improving,” said Casey, adding the company’s average out-the-door prices for its namesake and OshKosh baby clothing brands are planned up 10% in the second half.

“We were very thoughtful about the consumers’ tolerance for higher prices. We made a strategic decision to stay very competitive on pricing. We did not pass through all of our cost increases to consumers.”

Liz Claiborne Inc.
LIZ
shares shot up 16% to $6.36 also on Thursday after the company reported better-than-expected sales. Its gross margin, percentage of sales left after subtracting the cost of goods sold, widened to a better-than-expected 51.9% from 49.6%.

The company, while acknowledging higher commodity cost increases, credited the boost to things like licensing its namesake brand to J.C. Penney Co.
JCP, +2.97%
and increased sales from brands such as Juicy Couture, Kate Spade and Lucky Brand, which run at a higher gross profit rate than the company average.

For instance, Kate Spade, known for its handbag designs, saw its comparable sales surging 77% while sales at Lucky Brand rose 22%.

The company said early consumer reads showed good sales of new products at full price, with little to no resistance to a higher ticket price. The company said it’s controlling inventory tightly to reduce discounts. To boost profit margin, it’s also expanding its upscale acquired brands Stuart Weitzman and Kurt Geiger.

“We see some bright spots in the future with respect to product costs as certain raw material costs are coming down and factory capacity issues are softening considerably,” said Chief Executive Wesley Card on a conference call on Wednesday. “There continues to be mixed signals of strength in the economy. That’s translating to changing reads on consumer confidence.”

Jones stock was up 2.5% to $13.23.

VF Corp
VFC, +0.99%
., maker of Lee and Wrangler jeans as well as North Face ski jackets, said its price increase on jeans so far have also been met with little resistance. In fact, retailers ended up ordering more units in the first half, giving the company confidence and optimism, Chief Financial Officer Bob Shearer said in an interview last week. See story on VF demonstrating its pricing power.

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